Ethereum Smart Contracts Explained

Ethereum has opened up the brand new world with cutting-edge technologies and unique user experience. Automated sharing, smart marketplaces, medical record tracking, and even internet without servers! 

The smart contracts became a new technology based on a public blockchain. What is unique about Ethereum and smart contracts? Changelly explains the basics in this guide. 

Find out more about Ethereum cryptocurrency in Changelly’s review.

Who Invented Smart Contracts?

If you ask, every Ethereum nerd can tell you about how the platform was born. It all started with the conception of smart contracts developed by Nick Szabo in 1996. 

Szabo is one of the most influential figures in the crypto and tech world. He is a pioneering cryptographer and legal scholar who defined the term “Smart Contracts” and its importance for financial institutions. 

We’ve already told about the most famous people of crypto industry.

The idea of smart contracts implies the blueprint of relationships between two parties, where all contractual clauses are encoded in the hardware and software to make the contract breach unprofitable. 

Even though blockchain technology wasn’t even invented, Nick Szabo described the whole mechanism in the book called ‘Smart Contracts: Building Blocks for Digital Free Market’ in 1996. 

As an example of how smart contracts work, Szabo described a vending machine. Bob puts a quarter in the vending machine and then receives a Soda, whereas Alice puts a one-dollar bill and gets a soda and a change back. The vending machine acts as a contract bearer that offers anyone who has some coins to participate in an exchange.

In this case, it is not a soda, actually. Users input data or value and receive an item from a machine. These items can be a program, a couple of built blocks for DApps, and even decentralized companies, DAO. 

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Smart Contract Functionality

Smart contracts work the same way in the blockchain and operate according to cryptographic keys, security protocols, and other hard-coded rules. These rules were turned into today’s reality by Vitalik Buterin on July 30, 2015, when the Ethereum network has been launched.

The smart contract is an agreement between two people/parties in the form of computer code. It ran on the blockchain so that nobody can change the code. The contract will be automatically activated when certain conditions are met. 

Smart contracts – Simply Explained

Let’s overview an example of a smart contract. 

Brad wants to buy Kate’s house. We accept the agreement between them as a smart contract. WHEN Brad pays Kate 1,000 ETH,  THEN Brad becomes an owner of the house. When this agreement is put on the blockchain, nobody can change it. This smart contract will be automatically executed once Brad pays Kate for the house. 

If Brad and Kate don’t use the smart contract technology, they need to apply to some third-party services like a bank, some government agents, etc. 

Blockchain is the reason why a smart contract is such a great technology. It can be applied to many different life spheres. No one has control of blockchain because it is a shared database. 

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How Is Smart Contract Created and Executed?

Ethereum replaces Bitcoin’s script language with the one that allows developers to create their own programs. Ethereum smart contracts are written in Solidity programming language, which is a Javascript-like one. 

When the transaction occurs, the system needs the power to validate them. In order to compensate power and time, the transaction requires a fee, in the form of so-called Gas, which is paid in Ethereum (ETH) cryptocurrency. The amount of fee depends on the power required for a transaction. 

The smart contract technology has a unique functionality:

  1. It is multi-signature. That means that funds are spent only when the required percentage of people agree. 
  2. It provides utility to other contracts.
  3. It stores information about applications

Where Are Smart Contracts Used?

Three years later, Ethereum remains the most promising and popular project, after Bitcoin. As a pioneer in smart contract technologies, Ethereum has attracted millions of people, including IT and fintech investors, independent developers, and cryptocurrency enthusiasts.

The platform gave birth to thousands of Ethereum-based platforms, decentralized applications, and games and set the trend to build separate cryptocurrency projects alike. According to Etherscan, the Ethereum network runs over 268 thousand tokens.

We have already published the article about 5 real-life examples of smart contracts.

There are a lot of ways to implement smart contract technology. It started being widespread back in 2016-2017 when the ICOs crowdfunding became a thing. The technology can be applied to financial services such as money transferring and loan payments. 

However, the possibilities are endless: insurance, legal processes, health system, logistics, government, real estate, etc. Let’s see the real smart contract implementation.

  • Insurance. AXA is a French insurance company which first tested the flight-delay insurance based on smart contracts. If the flight is delayed by an agreed time, then the customer gets paid automatically. 
  • Prediction Market. Prediction platforms such as Augur and Gnosis became quite popular. The users create a prediction contract for any event and then get an automatic payout. It’s a thing for any bookmakers. 
  • Computer Power. Golem project is a great example of smart contract implementation. It represents the sharing economy, like an Airbnb. However, instead of accommodation, the users rent computing power.

The implementation and realization of smart contracts are limited only by developers’ imagination. 

Smart Contracts Advantages

  1. Trust. No one can lose the contract. 
  2. Safety. Tiny chance of hacking.
  3. Speed. Software code with automated tasks. 
  4. Accuracy. No errors can interrupt the process. 

ERC20 Standard

Cryptocurrencies that utilize Ethereum protocols are called Tokens that stand for units defining a balance on a certain wallet. Most of those are built according to ERC20. This is a universal smart contract standard for the Ethereum blockchain. 

The name ERC 20 is an abbreviation for Ethereum Request for Comment, where 20 is the number assigned to the request. The standard represents the common list of hard-coded rules required for interacting with the Ethereum ecosystem including transferring between addresses and execution of smart contracts. So whenever you see some crypto stated as an ERC20 token, rest assured, it is an Ethereum-based token running in the Ethereum network.

Changelly and Tokens

Changelly supports over 200 cryptos, the overwhelming majority of which are ERC20 tokens. You can easily exchange one to another at the best rates just in a few clicks.

If you have some questions regarding ERC20 tokens or how to buy them, or if you want to list your token, please inform us!

Smart Contract F.A.Q.

Here are some essentials questions and answers for those who do not have time to read the article. 

#1. What Is Smart Contract? 

The smart contract is an agreement between two people/parties in the form of computer code. It ran on the blockchain, so nobody can change the code. The contract will be automatically activated when certain conditions are met. 

#2. What Is Smart Contract Used for? 

Smart contract implementation is limited only by the developers’ imagination. The technology can be used in financial, health, real estate, betting, insurance, etc.

#3. Who Created Smart Contracts? 

The smart contract concept was conceived and designed in the 1990s by computer scientist Nick Szabo. 


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